Stock Ticks Focus of SEC Aid Meeting for Small Firms

Feb. 5 (Bloomberg) -- Investors, exchanges and other market
participants told the U.S. Securities and Exchange Commission
that changing “tick size” for some stocks can help fuel growth
by making it easier for emerging firms to go public.

The SEC will consider industry comments gathered at a
discussion on so-called decimalization today as it decides
whether to propose a pilot program increasing tick size, the
minimum quoting increment, for shares of select companies, a
step supporters say would boost initial public offerings.

“I know that many feel today’s market structure including
the current tick size regime does not recognize the particular
needs of smaller companies, and that a detailed examination of
the current structure is important and appropriate,” SEC
Chairman Elisse B. Walter said at the meeting in Washington.

The SEC is required under the 2012 Jumpstart Our Business
Startups Act to consider whether tick sizes for emerging growth
companies should be higher than the current one-cent level but
lower than 10 cents. Today’s meeting, involving executives from
companies such as exchange operator Nasdaq OMX Group Inc.,
online brokerage TD Ameritrade Holding Corp. and venture capital
firm Andreessen Horowitz, is part of the agency’s effort
evaluate the impact of tick sizes on securities markets.

Fewer Shares

Stocks of smaller companies tend to trade more lightly
because they have fewer shares available to the public.
Incentives to buy and sell the stocks were further reduced by a
series of SEC regulations issued between 1997 and 2001, David
Weild, a senior adviser at Grant Thornton LLP, wrote in a
statement for the meeting.

While the SEC’s 2001 mandate for decimalization, or trading
in decimals instead of fractions, reduced the cost to buy or
sell shares, it also reduced incentives for investment banks to
make markets in lightly-traded stocks. Combined with technology
changes and rules that boosted competition, the change decreased
the profitability of equity dealers, who used money earned on
wider bid-ask spreads to fund analyst research.

“When the coverage begins to take hold, you will see the
liquidity come back,” Jeffrey M. Solomon, chief executive
officer of investment bank Cowen & Co., said at today’s meeting.
“Because there is no place today for individual investors or
small-cap institutional investors to find the information they
need to make intelligent investments.”

Sharp Decline

Critics of decimalization point to a sharp decline in the
number of initial public offerings since 2001. About 150 to 350
IPOs raised less than $25 million each year from 1991 to 1997,
according to data compiled by Grant Thornton. Fewer than 50
companies did so annually beginning in 2000, the data show.

That view was challenged by several participants including
Kent Womack, a finance professor at the University of Toronto,
who said that private equity had “taken off” around the same
time that IPOs declined.

“Maybe the perfect market that we all wish for was still
there, the IPO market that is vibrant, maybe this just isn’t the
driving force anymore,” Womack said.

Brian B. Conroy, president of Fidelity Capital Markets,
said it wasn’t clear whether the benefits of increasing tick
sizes outweigh the costs to investors.

“We are concerned that if there are changes in
decimalization to raise the tick size, our transaction costs go
up to no discernible benefit to our retail client or end
investor,” Conroy said.

Market Structure

The SEC is weighing tick-size changes as it studies other
potential market-structure reforms. The agency is studying
elements of electronic markets and high-frequency trading such
as maker-taker pricing, in which an exchange pays providers of
liquidity for bids and offers and charges those executing
against them.

SEC Commissioner Daniel M. Gallagher, who attended part of
today’s meeting, said the commission has many market-structure
elements to study before agreeing to a pilot program.

“I don’t think it’s a slam-dunk decision just to do a
pilot,” Gallagher told reporters during a break. “We have real
deep thoughts to think about equity market structure.”

Several participants told the SEC that a pilot should be
based on characteristics such as market capitalization, public
float and measures of liquidity, or the ease of buying and
selling a security. The discussion generally suggested that
companies in a pilot should have market values below $1 billion.

“Minimum tick sizes should vary according to the liquidity
attributes of the individual stock,” Weild wrote in his
prepared remarks, adding that the least liquid stocks may
require tick sizes as large as 25 cents.